Author: Laura Dīriņa
Publication date: 02.05.2024
Indebtedness is common in the business process. Sometimes the inability to repay creditors' funds can even lead to bankruptcy. However, bankruptcy and insolvency laws provide for debt restructuring as one of the ways to avoid bankruptcy of a company. The purpose of debt restructuring is basically to restore the debtor's solvency.
What does debt restructuring mean?
Debt restructuring means changing the terms of debt repayment to restore and maintain the ability of a debtor in financial difficulties to repay debts to the creditor. Debt restructuring is carried out by voluntary agreement out of court or in court.
If there are no late payments, the first approach the creditor with a request to extend the debt repayment deadline or divide the unpaid amount into smaller parts, the deadline for debt repayment will also be extended.
Out-of-court debt restructuring
Before an insolvency proceeding is initiated in court, the debtor in financial difficulties and creditors have the opportunity to carry out a mutually agreed debt restructuring or out-of-court debt restructuring, as a result of which both parties try to reach an agreement to change the terms of debt repayment, allowing the debtor to continue economic activity.
Out-of-court debt restructuring is an alternative to the legal protection process in court.
Debt restructuring in the process of legal protection
The legal protection process is a procedure that allows a debtor who is in financial difficulties to restore his solvency through the methods of protection specified in the Insolvency Law. It can only be initiated by the debtor himself. The debtor has obliged a clear vision and business plan on how to restructure the business.
Example: How does the bank restructure the granted loans?
The bank evaluates the specific situation of each company and accordingly offers, from simple (e.g. postponement, reduction of the principal amount; extension of the final loan repayment period, etc.) to complicated restructuring solutions (e.g. matching the loan principal repayment schedule to the realization of the debtor's assets, developed examination of the plan of out-of-court legal protection measures, etc.).
The procedure of debt restructuring
At the beginning, a debt restructuring plan is developed. It is based on the principle of good faith and cooperation to find the most beneficial solutions for all parties.
Next, the hearing of all parties is coordinated.
The debtor's proposal is evaluated according to its legal correctness and economic validity of business development.
The analysis of the debitors' existing and planned financial flow, jointly measuring the possibilities of reducing economic activity expenses and increasing revenues.
The evaluation of the debtor's competitiveness and other possible advantages in the market.
The identification and application of new solutions.
The complete openness from all involved parties, expecting the availability of information about the debtor's liabilities, assets, economic activity, and forecasts.
The confidentiality of information.
Conclusion
The debitor needs to evaluate his ability to pay off the assumed obligations. Debt restructuring is a tool that helps change the terms of fulfillment of payments and find new solutions for business development. Out-of-court debt restructuring can reduce the costs of this procedure and demonstrate the debtor's ability and willingness to take responsibility for his obligations. Knowing the possible options for debt restructuring will provide the opportunity to choose the most suitable one for each business.
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